SAN FRANCISCO, Feb. 12 (AP)--Napster must stop allowing the millions of music fans who use its free Internet-based service to share copyrighted material, a federal appeals court ruled Monday. The three-judge panel allowed Napster to remain in business but told a lower court judge to rewrite her injunction that ordered Napster to shut down pending a trial in a lawsuit filed by the recording industry. The 9th U.S. Circuit Court of Appeals also said Napster must prevent users from gaining access to content on its search index that could potentially infringe copyrights. The appellate court had earlier issued a stay of the injunction. "This is a clear victory," said Hilary Rosen, president and CEO of the Recording Industry Association of America. "The court of appeals found that the injunction is not only warranted, but required. And it ruled in our favor on every legal issue presented." Redwood City-based Napster can stay in business until U.S. District Judge Marilyn Hall Patel retools her injunction, which the appellate court's 58-page opinion called overbroad. In fact, minutes after the panel's decision, thousands of Napster users were still trading music files on just one of the company's more than 100 servers. In a statement, Napster it was "disappointed" by the ruling and said it would appeal. "We look forward to getting more facts into the record. We will pursue every avenue in the courts and the Congress to keep Napster operating." The judges said it was apparent that "Napster has knowledge, both actual and constructive, of direct infringement," adding that the recording industry "would likely prevail" in its suit against the file-swapping service. "We affirm the district court's conclusion that plaintiffs have demonstrated a likelihood of success on the merits of the contributory copyright infringement claim," the ruling said.
"We, therefore, conclude that the district court made sound findings related to Napster's deleterious effect on the present and future digital download market," the appeals court ruled. "Having digital downloads available for free on the Napster system necessarily harms the copyright holders' attempts to charge for the same downloads."Napster argued that it was not to blame for its subscribers' use of copyrighted material, citing the Sony Betamax decision of 1984, in which the U.S. Supreme Court refused to hold VCR manufacturers and videotape retailers liable for people copying movies. Millions of users had flooded the company's computer servers this past weekend to download free music, fearing an immediate shutdown of the service that has changed the face of music. Napster has an estimated 50 million users. Webnoize, which monitors the digital entertainment economy, estimated that 250 million songs were downloaded using Napster over the weekend. Webnoize said that, on average, 1.5 million users were logged on to the system at any one time. Major record labels hoped today's ruling would force millions of computer users to pay for music the online music swapping service has allowed them to get for free. If Napster had won, however, the ruling could have given new life to other business ventures that have been waiting for guidance on whether a "personal use" exception to copyright law allows or prohibits trading songs over the Internet. The digital music technology Napster made popular is here to stay either way. The recording industry appears stymied by the notion of funneling music to consumers via the Internet for a price while freely available computer applications allow even the computer novice to do it for free. The five largest record labels -- Sony, Warner, BMG, EMI and Universal -- sued as soon as Redwood City-based Napster took off, saying it could rob them of billions of dollars in profits.
In May 1999, Napster founder Shawn Fanning released software that made it easy for personal computer users to locate and trade songs they had stored as computer files in the MP3 format, which crunches digital recordings down to manageable lengths without sacrificing quality. The concept of "peer-to-peer" song trading quickly proved too popular to contain. As Napster users grew by the millions, other file-sharing programs also popped up, such as Gnutella and Freenet. And the labels themselves are looking to use the same technology, only with paying subscribers and secure digital formats that prevent copying.

Since the appellate judges began deliberating in October, Napster has made agreements with former business foes like Bertelsmann AG, the parent company of the BMG music unit. The German media giant has promised much-needed capital if Napster switches to a subscription-based service that pays artists' royalties. The four other major labels were holding out for Napster's demise.

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